Cash-Out Refinancing

Cash-out refinancing replaces an existing loan with a larger one and pays the difference to the borrower in cash. It is the refinance step of BRRRR: the new loan is sized on the property's appraised value after the rehab, pays off the short-term financing, and returns some or all of the cash invested.

Lenders cap cash-out loans on investment property at 70 to 75% of appraised value, lower than purchase loans, and charge closing costs of 2 to 4% of the new loan. On a $260,000 appraisal at 75%, the loan is $195,000. After paying off a $135,000 hard money loan and $5,850 in costs, $54,150 comes back.

The proceeds are borrowed money, not income, so they are not taxed. They also come with a larger payment, which the rent has to cover. A home equity loan or line of credit is the alternative route to the same equity, usually at a smaller amount and a higher rate, and it leaves the first loan in place.

Further reading: Cash-Out Refinancing on Wikipedia.